Karnataka High Court Refuses To Quash SFIO Case Against Razorpay Directors Over Alleged Compliance Lapses

The Karnataka High Court has refused to quash criminal proceedings initiated by the Serious Fraud Investigation Office (SFIO) against two directors of Razorpay Private Limited over alleged lapses in merchant onboarding, KYC verification, due diligence, and monitoring of transactions involving a digital lending platform accused of coercive loan recovery practices.

Justice M. Nagaprasanna observed that the matter involved seriously disputed questions of fact.

“At this stage of the proceedings, there is no warrant of interference in the light of the issue, as observed, being shrouded with seriously disputed questions of facts,” the judge observed.

The petitioners were Whole-Time Director Harshil Mathur and Managing Director Shashank Kumar of Razorpay. They were arrayed as accused Nos. 8 and 9 in a complaint arising from an SFIO investigation into 33 companies.

The investigation followed a Registrar of Companies report alleging that JCIPL, a subsidiary of Fininty Private Limited, had created shell companies with dummy directors. The Central Government ordered an SFIO probe on September 9, 2022. One company under investigation, MENTPL, had entered into a lending services arrangement with NBFC X10 Financial Services. MENTPL allegedly used coercive loan recovery methods, generating wrongful gains of ₹56.63 crore. The SFIO alleged lapses by Razorpay's directors in KYC verification and transaction monitoring. It also submitted that Razorpay processed ₹320 crore in MENTPL transactions. The directors disputed the SFIO's jurisdiction over Razorpay.

The court took note of the respondent's submission that Razorpay had acted as a conduit for transactions worth approximately ₹320 crore involving MENTPL.

It noted that the directors had been implicated under Section 166 of the Companies Act on the allegation that they failed to discharge their fiduciary duties, particularly in relation to the transactions involving MENTPL.

“Whether such fiduciary duty is complied with by the petitioners or whether due-diligence is done by the petitioners or otherwise is a disputed question of fact, which can only be considered at the stage of trial,” the court observed.

The court also noted that the proceedings were still at a nascent stage. Although Razorpay itself had not been made a party, its role could emerge if further investigation was conducted or the matter was taken forward, it observed.

The directors' arguments would have to be considered at a later stage, the court held. It added that it could not conduct a mini-trial to decide disputed questions of fact while considering their plea to quash the proceedings.

The court observed that the petitioners would have to come out clean in a “full-blown trial” and rejected their petition as lacking merit.

For Petitioners: Senior Advocate Sandesh J Chouta and Advocate Abhishek Kumar

For Respondent: Advocates K Arvind Kamath, ASG and Anuparna Bordoloi, CGC